Daily Archives: February 11, 2010

Standard and Poors has revised its outlook for Estonia from negative to stable because of improved public finances.

“We believe Estonia has stabilized its public finances, which significantly increases its prospects for Eurozone accession in 2011. We are affirming our ‘A-/A-2′ long- and short-term sovereign credit ratings on Estonia,” said the ratings agency. Read more

Between 2010 and 2014, $1,400bn US commercial real estate loans will reach the end of their terms. Nearly half of them are currently in negative equity – that is, the borrower owes more than the property is worth. And banks are reducing the number of loans in the sector, and have been doing so throughout 2009.

More shocking is that banks and their auditors are typically well aware of the problem, but have not written down the value of property as prices have fallen. Instead they are “extending and pretending” – or “delaying and praying”: holding property values steady and assisting the borrowers where possible. They need to. If banks were accurately to record property values, they would write down assets on their own balance sheets and jeopardise their business (see example to right).

A very thorough report just released from the Congressional Oversight Panel expects many banks to go under when the pretence comes to an end. The report concludes: “There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public.”

When a government body admits things are at crisis proportions, you have to take notice. This isn’t journalistic hyperbole. It is hard to overstate the impact of the coming second subprime, hitting, as it will, a very fragile economic recovery.

So, who will be most affected? In a nutshell, banks, and mostly the smaller ones. Read more

Ralph Atkins

I am not sure I agree with my colleague Chris Giles’ analysis of today’s Brussels deal on Greece. Look at it this way. A year ago we knew that if the worst came to the worst, other eurozone countries would help a struggling member. Peer Steinbrück, Germany’s former finance minister, had told us as much.

Now, what’s new today? Not very much. There is pledge of “determined and co-ordinated action if needed to safeguard stability” in the eurozone but as yet no concrete offers of financial assistence (whatever Socialists leaders might have said). One could argue that ”determined and co-ordinated action” could also include simply making sure Greece sticks to its pledges of fiscal prudence. In other words, the policy of “tough love” remains in place. Read more

Chris Giles

Three wonderful ironies stand out from the tentative eurozone plan to back Greece in its hour of need. The Eurogroup’s leaders have agreed to pressure Greece to shore up its public finances, use International Monetary Fund expertise to help set the framework for reducing borrowing, but back Greece with an offer of emergency funds if it required liquidity and could not borrow in the markets. Socialist EU leaders issued a statement last night, talking about “a last-resort mechanism of financial support, coupling lending by private banks with a guarantee to be provided by eurozone members”. Read more

Nigeria’s central bank is honing plans to categorise banks by region or speciality. The idea, discussed in January, would reject the current banking model in which all banks are all things to all people. Read more

The Swedish central bank has kept the repo rate at 0.25 per cent, but brought forward the likely date of first rise to summer or autumn and substantially increased its inflation forecast for 2010.

Economic recovery is on more solid ground, both in Sweden and internationally, the Riksbank believes. “The risk of a major setback in the recovery of the economy has declined and that the upturn therefore rests on more solid ground,” said the statementRead more

Robin Harding

A Japanese contact, who shall remain nameless, recently urged me to read the questionnaire that US academic Adam Posen submitted to the UK’s Treasury Select Committee last July before he became a member of the Bank of England’s Monetary Policy Committee.

Mr Posen is an expert on Japan’s lost decade who wrote two books on it in 1998 and 2000. His answer on Japan is both an excellent summary of the lessons – such as the limitations of quantitative easing – and revealing on how Japan’s economic situation hasn’t developed quite the way that anybody expected.

It is worth reading in full – question 10 on page 8 – but I’ve posted a few of the most interesting paragraphs below. Read more

Eurozone members will effectively lend their credit ratings to Greece, to tide the country over with affordable debt while it sorts out its finances.

Financial support will probably come from private banks coupled with loan guarantees from member states. This seemingly roundabout process keeps the liabilities off states’ balance sheets but means banks will lend to Greece at rates they would otherwise reserve for Germany, or France, for example.

Other options involving actual cash – such as accelerating disbursements of EU regional aid funds to Greece – have been met with extreme reluctance by member states. Read more

Chris Giles

In trying to understand how the Bank of England responds to economic news and ideas, it is important to know how its forecast changes every three months to understand the big picture of the Bank’s thinking on the economy. But this is impossible because the fan charts are a bad graphical representation of the Bank’s view. I have told the Bank many times why the fan charts are rubbish, but not until now written down the reasons.

Here are the Bank’s growth (green) and inflation (red) big pictures published from November (left) and February (right).

 Read more

Ralph Atkins

House prices have never featured as a dinner party topic in the eurozone in the way they have in the UK or US. But there is real news today – the first annual fall in prices recorded since 1982.

The unprecedented drop is revealed in the European Central Bank’s latest monthly bulletin, and throws into reverse years of strong growth since the euro was launched in 1999.

Just one thing might temper the excitement, however. The 2.4 per cent nominal fall refers to house prices in the first half of 2009. Yes, last year. As the ECB goes onto argue later in its bulletin, housing market statistics are woefully lacking in the eurozone. Not only is the data old. There is no harmonised European series. The ECB’s figures are compiled by putting together national indices. (The FT carries out a similar exercise, allowing cross country comparison in house price trends.) Read more

Public sector wages in Portugal will be frozen until 2013 as part of government plans to cut the deficit from 9.3 per cent last year to below 3 per cent by 2013. Wage increases would, at best, match inflation.

The Socialist minority government’s 2010 budget bill, which is set to be approved as a whole in parliament today with the abstention of the centre-right Social Democrats, includes this public sector wage freeze (from Diario Economico via Reuters). Read more

The Indian central bank has asked Paypal to suspend some cash transfers to and from the subcontinent, leaving thousands of small companies without an income.

The Reserve Bank of India said yesterday that Paypal was not properly registered, following a change to the law in 2008. “Providers of cross-border money transfer service need prior authorization from the Reserve Bank under the Payment and Settlement Systems Act,” a spokeswoman told the NYT. “PayPal does not have our authorization.” The problems may take months to solve. Read more

Korea’s central bank has kept the seven-day repurchase rate at 2 per cent, in spite of rising inflation. Citing uncertainty in economic growth – “due to the risk of government debt crises in some European countries” – the Bank of Korea said it would retain its accommodative stance. The central bank said it expected inflation to stabilise and added the “upward trend of real estate prices ha[d] been blunted”.

Governor Lee Seong Tae has likely come under pressure to keep rates on hold from the Korean government, which is facing regional elections. President Lee Myung Bak has put jobs at the top of the political agenda, with unemployment in January rising to 4.8 per cent – a ten year high.

Simone Baribeau

Admittedly, the Washington snow shutdown has left me feeling a bit contrarian today. So I couldn’t help but feel it was appropriate that a working paper published today by the Federal Reserve Bank of Richmond found that “inventories do not play a role in explaining inflation dynamics within our New Keynesian Phillips curve framework.”

Get in line, inventories. Plenty of things don’t play a role in explaining inflation dynamics. Read more

Simone Baribeau

Ben Bernanke, Federal Reserve chairman, didn’t testify before the House Financial Services committee today on the central bank’s exit strategy. The committee meeting, like virtually everything else in the US capitol, was thwarted by the snow.

He did, however, release his prepared testimony, which received (as always) brilliant coverage in the FT, earlier on this blog, and in an editorial and other comment.

But I spent my day in a shutdown city. And in the spirit of passing time in a city where very little got done today, I’m choosing to write about what Mr Bernanke didn’t say, rather than what he did.

1. Mr Bernanke did not say how much will it cost the Fed to pay interest on banks’ holding of bank reserves. Read more